July 2018 Market Review and Outlook

Aug 1, 2018

The US stock markets rose during the month of July as mostly strong corporate earnings trumped weakness in Technology shares. Additionally, fears of a prolonged trade war with China eased a bit as news reported that Treasury Secretary Steve Mnuchin and Chinese Vice Premier Liu He may restart trade discussions.

All of the major US stock indices finished higher for the month of July. The Dow Jones Industrial Average posted a 5% gain, the S&P 500 added 3.8%, the NASDAQ rose 2.4%, and the Russell 2000 small cap index squeaked out a rise of 2 basis points.

Sectors had mostly positive results, with all sectors except Communication Services (-2.8%) and Real Estate (-1.0%) in the black. Financials were the best-performing sector, rising 5.9%. Health Care (5.5%) and Industrials (5.1%) were the next-best performers. Although Technology shares posted positive monthly gains, they faced a “reversion to the mean” with downward pressure from disappointing earnings from high-profile companies Facebook and Netflix. Both companies have fallen into bear-market territory – a drop of more than 20% from recent peaks. And nearly 40% of the Technology sector is in correction territory – a fall of 10% or more from a recent top. The broader implication may be the markets are rotating from growth to value names.

Oil gave back about a quarter of its 2018 gains during July, falling over 5%. Oil prices rose during the month, recording a gain of more than 20% for the year-to-date. West Texas Intermediate crude settled at $68.76 a barrel, as concerns about Iranian oil abated. However, sanctions on Iranian oil are set to begin in November, which may result in a fall in supply and an increase in prices.

The yield on the 10-year continued to rise close to 3% again during June, as the GDP reached 4.1%, its strongest level in four years. This data reinforced the expectations for further Fed interest rate increases in 2018, and subsequently pushed yields higher.

Economic indicators showed mostly positive results. The Chicago PMI gained 1.4 points to 65.5, the highest reading in six months. Any reading above 50 indicates improving conditions. The Consumer Confidence Index increased in July to 127.4, up from 126.5 in June. The unemployment rose .2% to 4.0%, with the number of unemployed persons increasing by about 500,000 to 6.6 million. This rate is still near historic lows, and below the 4.3% rate from a year earlier. The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.1% in June on a seasonally adjusted basis. Over the last 12 months, the all-items index rose 2.9 percent. This data supports the Fed’s intention to continue interest rate increases.

The US stock markets remain positive for the year, but volatility may emerge at any time. Interest rates increases, trade war tensions, and geopolitical risks may all provide a catalyst for a market correction. While the economy appears fundamentally sound, at any time a black swan event could derail the markets. Investors should be prepared for further hiccups by ensuring that their equity exposure matches their risk profile.